Mediation Process for IRS Offers in Compromise

Starting in 2015, the IRS is offering taxpayers the option of going to mediation if their Offer in Compromise negotiations with the IRS Appeals Office are unsuccessful.

If you owe a tax debt to the IRS and can’t reasonably afford to pay the full amount, you can try to get the IRS to settle the debt for less than the full amount you owe by asking the agency to agree to an Offer in Compromise (OIC). In some cases, the IRS has accepted as little as one penny on each dollar owed by a taxpayer. However, getting the IRS to agree to an OIC is not easy. You have to file a lengthy application in which you fully disclose your income, assets, and living expenses, and offer to pay a specific amount to satisfy your tax debt—either in a lump sum or by making monthly payments. The amount of your offer must be equal to the "realizable value" of your assets plus the amount of money the IRS could take from your future income (earnings minus living expenses allowed by the IRS).

The IRS will accept your OIC only if (1) you convince it that you aren't able to pay the full amount in a reasonable time, or (2) due to exceptional circumstances, payment in full would cause an "economic hardship" or be "unfair" or "inequitable”-- for example, you can’t work due to health problems.

Most OIC applications are rejected by the IRS. This is often because incomplete information is provided in the application, or because the IRS disagrees with the applicant’s valuation of his or her assets or future income potential.

If your application is rejected, you have the option of appealing to the IRS Appeals Office. This is a separate division within the IRS. An appeals officer will examine your OIC application and decide whether your OIC should have been accepted. Usually, there are negotiations in which the appeals officer and taxpayer try to reach an agreement on a settlement acceptable to both.

This appeal is your last chance for an OIC—you cannot take the IRS to court for rejecting your offer. However, starting in 2015 the IRS is offering taxpayers the option of going to mediation if their negotiations with the Appeals Office are unsuccessful. The IRS Appeals Office may also request such mediation, but the taxpayer involved does not have to accept.

Such post-appeals mediation is purely optional. It’s an informal procedure in which a trained mediator tries to help the parties resolve their dispute about how much the taxpayer can afford to pay to satisfy the tax debt. The appeals mediator has no power to render a decision or to force either party to accept a settlement—however, the mediator may suggest settlement proposals. If you use the mediator supplied by the Appeals Office (an IRS employee), the mediation is free. You also have the option of bringing in an outside co-mediator at your expense.

The mediation is designed to help the taxpayer and the Appeals Office resolve the following types issues:

  • the value of the taxpayer’s assets
  • a taxpayer’s interest in jointly held assets
  • projections of the taxpayer’s future income
  • the calculations of the taxpayer’s future ability to pay
  • whether the taxpayer's living expenses exceed IRS standards, and
  • other factual determinations, such as whether a taxpayer’s contributions into a retirement savings account are discretionary or mandatory as a condition of employment.

Mediation is not available if you refuse to increase your offer without stating any specific disagreement with the valuations, figures, or methodology used by the appeals officer. Nor is it available if you have the ability to pay in full based on the unadjusted financial information you submitted, except when economic hardship exists.

The IRS’s goal is to complete the mediation process within 90 days after the mediation request is approved. Since it’s free, it seems taxpayers have little to lose in asking for such mediation. However, the normal 10-year statute of limitations on the time the IRS has to collect a tax debt is extended by the time spent in mediation.

For more details, see IRS Rev. Proc. 2014-63 and the IRS Appeals Mediation Programs webpage.

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